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Chapter 1

Example 1

On 31 March, Ahmed’s employment with GSL came to an end and on 1 April,
Ahmed set up in business as a sole trader trading as ‘Ahmed’s Matches’, to
sell boxes of matches from a tray on a street corner.

Ahmed deposited $100 into a bank account opened in the name of Ahmed’s
Matches. He persuaded a supplier of matches to let him have an initial
inventory of 400 boxes, costing 5¢ each, and promised to pay for them one
week later.

During his first day of trading he sold 150 boxes at 12¢ each – generating $18
in cash. Feeling pleased, he took $5 from the cash tin and treated himself to
supper at the local café.

He also wrote a cheque for $5 to his supplier in part payment for the initial
inventory of boxes.

Required:

Illustrate the effect of each of these transactions upon the accounting
equation.

Example 1: Solution

To begin with, the only asset of the business entity was $100 in the business
bank account. Capital invested by Ahmed also amounted to $100 and the
accounting equation would then be as follows:

Assets = Liabilities + Capital
Bank $100.00 = 0 + Capital $100.00

The business entity then acquired matches worth $20 with a corresponding
liability due to the supplier. The accounting equation now looks like this:

Assets = Liabilities + Capital
Bank $100.00 = Payables $20.00 + Capital $100.00
Inventory $20.00
––––––– –––––– –––––––
$120.00 = $20.00 + $100.00
––––––– –––––– –––––––

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